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1.Introduction
In today's tech-driven era, ensuring everyone has access to financial services is crucial for steady economic growth, particularly in developing countries like India. With its large and varied economic scene, India has been a leader in using technology to minimize financial disparities among its citizens. A key player in this change has been the India Stack, a digital platform that manages identity, payment, and data.
Recent figures from the Reserve Bank of India (RBI) highlight the significant influence of this tech-driven change. The Financial Inclusion Index (FI-Index), which measures how accessible financial services are to all citizens, increased to 60.1 in 2022-23, up from 56.4 the year before. [1] This index, which scores from 0 (no financial inclusion) to 100 (full financial inclusion), showcases India's progress in ensuring all citizens, regardless of their financial status, can access vital financial services. The FI-Index considers various sectors like banking, investments, insurance, postal, and pensions and is built on three main aspects: access, usage, and quality, each showing different facets of financial inclusion.
The rise in the FI-Index is more than just a statistic; it symbolizes the tangible effects of policies and technologies that have made financial services more reachable and user-friendly. Ten years ago, the story was quite different. Financial services were mostly confined to cities, leaving a large part of the population, especially in rural areas, without banking services. Now, thanks to the India Stack and initiatives like Aadhaar, digital payments, and open-access software standards, the situation has changed. Rural areas and Micro, Small, and Medium Enterprises (MSMEs) are now more connected to the formal financial system than ever before.
This document explores the development, impact, and future possibilities of the India Stack in making credit more democratic and creating a unified network of financial services. By combining data, insights, and forward-thinking viewpoints, the document seeks to provide a thorough overview of how technology can be used to promote financial inclusion in one of the world's most vibrant economies.
2.India Stack: A Digital Revolution in Financial Inclusion
India Stack is a groundbreaking project in the digital infrastructure space, designed to revolutionize how services, particularly in the financial sector, are accessed and provided in India.
In essence, India Stack merges digital identity, payment, and data management systems with the goal of expanding access to financial services in an economy that largely relies on cash transactions. The framework of this system is based on three primary components:
Digital Identification: This began in 2010 with the introduction of Aadhaar, a digital ID system that uses biometric data. Impressively, in just ten years, nearly 90% of India's
population (around 1.2 billion individuals) have registered for a digital ID, and half of them have connected it to their bank accounts.
Digital Payments: Standards for open-access software have been developed to enable digital transactions among banks, fintech companies, and digital wallets.
Data Management: The access to personal data is controlled through consent, ensuring that privacy and security are maintained.
In simpler terms, India Stack is a digital tool that helps people in India access and use financial services more easily by using a digital ID, making digital payments smoother, and managing personal data securely.
2.1Components of India Stack for Financial Inclusion
India Stack, a digital framework crafted to boost service delivery without physical presence, paper, and cash, has been crucial in hastening financial inclusion in India. The platform has been vital in establishing a safe, open, and interoperable digital ecosystem for businesses and individuals, thereby making a substantial contribution towards financial inclusion [2]. This section sheds light on the impact of each layer of India Stack on financial inclusion:
2.1.1 Presenceless Layer - Aadhaar & eKYC:
The presence-less layer, anchored by Aadhaar, a 12-digit unique identity number, has enabled the establishment of a digital identity for over a billion Indian citizens, thereby removing the necessity for physical presence to access various financial services. This layer has aided in the creation of Jan Dhan accounts, which are complimentary savings accounts that act as the foundational elements of the digital financial ecosystem. Aadhaar has played a crucial role in ensuring that government subsidies and benefits are directly delivered to the intended recipients, minimizing leakages, and ensuring efficient delivery of financial services. The Aadhaar-enabled Payment System (AePS) has allowed citizens, particularly in rural and remote areas, to carry out financial transactions electronically using their Aadhaar number, thereby boosting financial inclusion. An extension of Aadhaar, eKYC, fortifies identification systems by supporting Aadhaar-linked bank accounts. This presence-less verification system has been crucial in simplifying identity verification processes.
2.1.2 Paperless Layer - DigiLocker & eSign:
DigiLocker, a vital element of the paperless layer, enables citizens to store and share digital documents, thus minimizing reliance on physical documents to utilize financial services [3]. This system is linked to various government documents, ensuring that citizens can access online documents with authenticity guaranteed by the government, thereby simplifying the document verification process for financial institutions and reducing fraud. An electronic signature service, eSign, allows users to sign documents digitally, ensuring authenticity and security.
2.1.3. Cashless Layer - UPI & Interoperable Payments:
The Unified Payments Interface (UPI), placed under the cashless layer, has radically changed the manner in which transactions are executed in India. It has facilitated real-time transactions both peer-to-peer and peer-to-merchant, thereby advocating for a cashless economy. UPI ensures that financial transactions are accessible, smooth, and devoid of cash, providing a platform for the unbanked and underbanked population to access financial services without requiring physical banking infrastructure. UPI serves as the core of the digital financial architecture, simplifying financial services, particularly for small businesses. Its interoperability with digital wallets, IMPS, and net banking has rendered transactions straightforward and inclusive. The initiation of interoperable payments through QR codes has made financial transactions more mobile and accessible. Small traders and local stores have emerged as significant advocates of this digital wave. By offering a simple and accessible platform for financial transactions, UPI has democratized digital payments, enabling users across various socio-economic classes to conduct digital transactions with ease.
2.1.4 Consent Layer – Account Aggregator
The consent layer facilitates secure data sharing, ensuring that individuals maintain control over their data and can securely share it with financial institutions. This layer is vital for financial inclusion as it allows individuals to securely share their data with financial service providers, enabling them to access a variety of financial products and services based on their data. The consent layer also enables financial institutions to offer customized products and services by accessing customer data (with consent), thereby improving financial product accessibility and inclusion. By ensuring secure data sharing, the consent layer has established trust among users in the digital financial ecosystem, thereby motivating more individuals to engage in the formal financial sector.
An Account Aggregator, a significant component in the consent layer, is an entity that facilitates the structured sharing of financial data from Financial Information Providers (FIPs) to Financial Information Users (FIUs). This is done while maintaining a record of the consent provided by the user, and also providing the functionality to manage and withdraw this consent at any time.
2.2 Impact of India Stack on Financial Inclusion
India Stack, a digital platform initiative, has been crucial in transforming India's financial scene, particularly regarding financial inclusion. It represents the country's aspiration for a future where everyone is included in the digital realm. Every element of India Stack, from Aadhaar to UPI, has been carefully crafted to guarantee that all Indians, regardless of their socio-economic status, can effortlessly access vital financial services. Let's explore the influence of India Stack on enhancing financial accessibility in India.
1.Broadened Identity Verification: The India Stack's Aadhaar, a 12-digit identity number linked to biometric data, now covers 90% of the Indian population. [5]. This vast coverage has streamlined the e-KYC (Electronic Know Your Customer) process, making it more efficient and inclusive.
2.Expansion of Banking Services: Before the full implementation of India Stack in 2011, only 1 out of 3 people had a bank account. [6] The Pradhan Mantri Jan Dhan Yojana was launched with the aim of providing every household in India with a bank account. This initiative was backed by the Aadhaar system, which made identity verification seamless. Within just a year of its launch, 166 million people had opened bank accounts under this program. By 2019, this number had surged to almost 384 million. This surge was facilitated by the ability to pay government benefits directly into these newly opened accounts, allowing people to access their funds conveniently through debit cards or smartphones.
3.Digital Payments and Financial Access: A decade ago, India's bustling local markets predominantly operated with cash transactions. However, with the advent of India Stack, there has been a significant shift towards digital payments. Today, it's common to see transactions being carried out using smartphones in even the most remote parts of the country. The India Stack, which came into effect in 2016, has seamlessly integrated with both merchant and customer behavior, making digital payments and online business management second nature.
The Unified Payments Interface (UPI) has been a game-changer in the way financial transactions are conducted in India. With the introduction of UPI, small traders, local stores, and even street vendors have adopted digital payments, making money transfers more accessible and mobile-friendly. The added layer of QR codes has further simplified transactions, making it easier for even those with minimal technological know-how to participate in the digital economy. Today, millions in both the formal and vast informal economy can effortlessly make payments, settle invoices, and transfer funds across the country using smartphones. The COVID-19 pandemic further accelerated the shift towards contactless digital payments for small transactions, emphasizing the importance of digital financial tools in times of crisis The Indian government utilized the India Stack to disburse US$44 billion to women and small farmers as part of its COVID-19 relief program. This showcases the platform's capability to efficiently handle large-scale financial transactions.
3.India Stack - A Digital Public Infrastructure for Credit Democratization
India Stack's digital framework has accelerated financial inclusion, establishing a safe, open, and compatible digital environment. This has been particularly advantageous for businesses and individuals in the MSME and rural sectors, who have typically been overlooked by the traditional financial system.
Micro, small, and medium enterprises (MSMEs) are scattered throughout India's economic landscape, serving as a crucial driver of its growth path. These enterprises play a significant role in the nation's GDP and employment. However, despite their critical role, MSMEs encounter a significant obstacle: obtaining credit.
The MSME credit gap, indicating the unfulfilled credit demand by the financial system, is a whopping $250 billion, which is nearly 10% of India's GDP. This figure becomes even more concerning when recognizing that MSMEs contribute to over 30% of India's GDP growth and provide employment to over 100 million people. However, only a scant 11% of these enterprises can access formal credit channels, leaving a massive 60% of all credit demand unmet.
The obstacles in extending credit to the rural and MSME sectors involve several structural challenges, such as:
High Risk: A notable number of potential borrowers either possess unsatisfactory credit scores or have no credit history at all. The lack of pertinent data makes the processes of collecting and repaying loans risky for lenders.
High Operational Costs: The expenses related to obtaining, underwriting, and collecting loans often discourage lenders from focusing on smaller borrowers because it becomes financially impractical.
Limited Access: Numerous lenders struggle to connect with a large portion of potential borrowers due to the constraints of current online and offline channels.
India's Digital Public Infrastructure (DPI), spearheaded by India Stack, is set to tackle the aforementioned structural challenges that have persistently troubled the credit scenario for the Rural and MSME sectors in the following ways:
The efforts within India Stack aim to reshape access to MSME credit and market access in the following manners:
Revitalize the Ecosystem: By converting each service provider into a technology powered credit and product marketplace, these platforms aim to make credit access universally available.
Facilitate Cashflow-based Lending: Through incorporating the Account Aggregator (AA) framework, these platforms will support lending based on cash flow, guaranteeing that credit reaches businesses and individuals at the bottom of the pyramid.
3.1Major Initiatives towards Credit Democritisation
3.1.1Account Aggregator
The broad financial sector has benefited from the accessibility of financial data through the Open Banking–Account Aggregator (AA) Framework. This setup enables users to securely and effectively access and share their financial data digitally, aided by Account Aggregators, which are regulated by the RBI. Customers authorize AAs to request data from Financial Information Providers (FIP), such as banks and share this data with Financial Information Users (FIU), entities regulated by any financial sector regulatory authority. This framework allows customers to use their financial data to access additional services. Like other initiatives under India Stack, the AA Framework is driven by government entities to enhance competition and increase inclusion.
3.1.2Open Credit Enablement Network (OCEN)
Utilizing open data initiatives, the advancement of financial service accessibility has been significantly driven by the OCEN (Open Credit Enablement) initiative. Historically, the difficulty of acquiring credit in India has been a substantial obstacle to economic development. The Standing Committee on Finance indicates that less than 40% of MSMEs access credit through official financial channels, often turning to costly and unreliable credit sources instead. Building on the principles of the AA Framework, OCEN converts the lending process into a completely digital operation. It introduces consistency to the loan lifecycle across different financial entities and marketplaces. Within the OCEN Framework, credit requirements are shared with all potential lenders in the open network, ensuring that all relevant data about a potential borrower is uniformly available to prospective lenders. This not only provides borrowers with a range of offers but also heightens competition in loan provision.
OCEN operates by combining and automating various manual processes involved in the lending value chain, including activities like screening potential loan-worthy customers and onboarding new borrowers. Consequently, OCEN not only lowers the overall operating costs for lenders but also boosts their efficiency. A notable feature of OCEN is its ability to significantly aid MSMEs (micro, small, and medium-sized enterprises). The network strives to make the process for MSMEs to obtain formal loans simpler, thereby enhancing credit access for last-mile borrowers.
3.2 Interoperable Payments and Credit Line on Unified Payments Interface (UPI)
The Unified Payments Interface (UPI) has revolutionized financial transactions in India by introducing a swift, real-time payment system. Achieving widespread adoption due to its user friendly design and incentives for private sector participation, UPI is used across various sectors, including by individuals and micro, small, and medium enterprises (MSMEs), with notable use among smaller merchants. Its mobile-friendly design, which allows easy initiation of payments.
through aliases and QR codes, ensures thorough compatibility among financial entities. This has not only enhanced digital and financial literacy but also encouraged previously inactive population segments to use financial services. As of January 2023, UPI accounts for 75% of all payment transactions by volume. Additionally, its integration into well-known payment interfaces like Google Pay, PhonePe, and Paytm has enriched consumer experiences and driven its adoption.
A recent feature introduced to UPI is the "Credit Line." The Reserve Bank of India (RBI) recently introduced the Credit Line feature on UPI, allowing users to link their credit facilities directly to their UPI-enabled apps. [11] Credit Line on UPI provides a pathway for consumers to access pre- approved credit lines from banks via UPI, simplifying the process of obtaining and using credit for quicker transactions. This move by the RBI is aimed at reducing the cost of financial offerings and fostering the development of unique financial products in the Indian market.
3.3 Beyond Credit Democratization: Building an Integrated Financial Services Ecosystem
The digital transformation in India's financial sector, led by initiatives such as India Stack, has laid the foundation for a unified financial services ecosystem. This system, supported by technology and innovation, vows to address the distinct needs of rural Indians and MSMEs, guaranteeing that they are not excluded from the digital transition journey. Let's delve into a thorough exploration:
Tailored Financial Solutions: Institutions are now capable of providing products customized to individual requirements, merging credit, insurance, and savings. For MSMEs, access to real-time financial data has been transformative. It assists in creating products that are specific to their operational requirements, like working capital loans, trade insurance, and business savings accounts. The emergence of neo-banks, which function completely online, further highlights the move towards personalized financial solutions, closing the gap between conventional banking and the demands of the digital age.
Real-time Financial Data: The access to real-time financial data, enabled by platforms such as Account Aggregator, has transformed risk evaluations for credit and insurance products. This approach, grounded in data, ensures that financial products are crafted with accuracy, addressing the particular risk profiles of individuals and businesses.
Low-Cost, High-Impact: Through the digital infrastructure of India Stack, there's a revitalized emphasis on micro-insurance and micro-savings. These affordable, small-scale products are particularly apt for rural communities, guaranteeing they have access to crucial financial services without being weighed down by hefty costs.
Educational Outreach: Digital infrastructure can serve as a potent instrument for distributing educational material about financial products. Platforms supported by India Stack can assist rural and MSME users in making knowledgeable decisions, ensuring they possess the understanding to effectively traverse the financial environment.
Unified Financial View: With a unified perspective of a person's financial data, institutions are uniquely positioned to offer customized advice. Whether it's suggestions on saving, insights into investments, or direction on insurance, the digital ecosystem ensures that advice is bespoke, pertinent, and timely.
In summary, the integrated financial services ecosystem, fueled by India Stack and additional digital initiatives, carries tremendous potential. It provides a comprehensive array of services, ensuring that rural Indians and MSMEs have access to financial products that are customized, transparent, and reliable.
4.India Stack and Integrated Financial Services Ecosystem: Benefits for Rural and MSME Sectors
India Stack, possessing a multi-tiered digital framework, carries substantial potential to transform the financial scene for rural Indians and MSMEs. Every layer of India Stack tackles particular challenges and provides solutions that can assist in constructing a unified financial services ecosystem. Let's explore each layer:
5.Recommendations
The capacity of India Stack to alter the financial landscape for rural Indians and MSMEs is clear. However, to utilize its complete potential and guarantee extensive adoption, a strategic and thoroughly devised approach is crucial. Based on recent advancements and insights, the following suggestions and action plans are proposed:
6.Conclusion
India Stack, boasting its distinctive digital framework, has surfaced as a pivotal force in altering India's financial terrain. Its ability to innovate financial services for the MSME and rural sectors is unmatched. With over 633.9 lakh MSMEs in India, where 99% are categorized as micro enterprises, the demand for a cohesive financial ecosystem is more evident than ever.
The suggestions and action strategy detailed in this document offer a guide to fully leverage India Stack. By concentrating on comprehensive financial perspectives through Account Aggregators, smooth lending with OCEN, digital identity via Aadhaar, and consolidated payments through UPI, we can lay the foundation for an all-encompassing financial ecosystem that addresses the specific needs of rural Indians and MSMEs.
Moreover, the focus on financial literacy, innovation, and amalgamation with government schemes highlights the necessity of a varied strategy. The future of financial inclusion in India is contingent upon the successful adoption and execution of these recommendations.
Recent evolutions in the financial services industry, such as investments in technology to supplant legacy systems and the escalating significance of AI and ML, further highlight the need to expand the horizons of technological innovation. India Stack, with its sturdy framework, can act as the bedrock for these advancements.
In conclusion, the immediate subsequent steps, focused around the recommendations and action plan, along with future developments centered on the advantages of India Stack for the MSME and rural sectors, can lay the groundwork for the creation of a unified platform for financial services. It is vital for all stakeholders to recognize the potential of India Stack beyond credit democratization and to play their respective roles in ensuring a comprehensive financial service ecosystem for individuals at the base of the pyramid.
Meet The Thought Leader
Vamsi is a mentor at GGI, and has a diverse background that includes being a former McKinsey employee and a graduate of IIT Madras. He possesses a broad skill set encompassing strategy and operations, gained from his various roles and industry exposure.
Meet The Authors (GGI Fellows)
My name is Akhil Gopi, and I’m basically from Kerala. I'm an engineering and management graduate with an overall experience of nine years in Information Technology, Banking and Financial Services, Fintech sector and Government projects. I did my post-graduation in Rural Management from Institute of Rural Management Anand, Gujarat and I did my graduation in Electronics and Communication Engineering from Amrita School of Engineering, Amritapuri, Kerala.
If you are interested in applying to GGI's Impact Fellowship program, you can access our application link here.
References:
1. India’s financial inclusion deepens in FY23, shows RBI data
2. How India Stack Is Paving The Way For Financial Inclusion
3. How India is using digital technology to project power
4. Account aggregators - putting the customer in charge
5. How the India Stack paved the way for financial inclusion in the country
6. Stacking up the Benefits: Lessons from India’s Digital Journey
7. Stacking up Financial Inclusion gains in India
8. What the world can learn from the India Stack
9. How OCEN Is Democratizing Credit Access In India;What is OCEN? How it Democratizes Digital Lending Process
10. India Stack 2.0 - Revolutionizing Credit and Market Access for 60 million MSMEs
11. Credit Lines on UPI: A Revolutionary New Way to Pay and Borrow
12. Explainer I How the new pre-sanctioned bank credit lines through UPI will work
13. Chapter VIII: Top FinTech trends in 2023 - EY
14. Neo-banks in India: The Future of Banking
15. Outlook 2023: Key factors to watch out for financial services industry
16. India's maturing fintech ecosystem: Five companies to watch in 2023
17. Driving India's Financial Transformation: RBI's FinTech Agenda 2023-24